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Student Loans and Bankruptcy

Posted by John Ioakimidis | Nov 18, 2023 | 0 Comments

Discharging student loans in bankruptcy is a complex and often misunderstood process. Traditionally, student loans have been notoriously difficult to discharge in bankruptcy, but recent legal developments and shifts in court opinions are changing this landscape.

Understanding the Bankruptcy Code and Student Loans

The U.S. Bankruptcy Code treats student loans differently from other types of debt. Under sections 523(a)(8) of the Code, student loans are not dischargeable unless the borrower can demonstrate that repaying them would impose an "undue hardship." However, the Code does not provide a clear definition of undue hardship, leaving this interpretation to the courts.

The Brunner Test: A Key to Discharging Student Loans

Most courts use the Brunner test to determine if a student loan can be discharged. This test requires the debtor to meet three criteria:

  1. The debtor cannot maintain a minimal standard of living if forced to repay the loans.
  2. The financial hardship is likely to persist for a significant portion of the loan repayment period.
  3. The debtor has made good faith efforts to repay the loans.

Meeting all three criteria can be challenging, but not impossible. However, the strict interpretation of these criteria has often been a significant barrier for borrowers seeking relief through bankruptcy.

Recent Trends and Court Cases

In recent years, there's been a notable shift in how courts interpret the undue hardship standard. Several cases have seen judges take a more lenient and holistic view of borrowers' financial situations, leading to a growing number of successful student loan discharges in bankruptcy. This trend reflects a recognition of the increasing financial burden that student loans represent, especially against the backdrop of rising education costs and economic challenges.

The Process of Discharging Student Loans in Bankruptcy

To discharge student loans, a debtor must file a separate action known as an adversary proceeding within the bankruptcy case. This proceeding is essentially a lawsuit within the bankruptcy case, where the debtor argues that repaying the student loans would cause undue hardship.

Legal representation is crucial in these proceedings, as the process is complex and requires a thorough understanding of bankruptcy law and the Brunner test. Additionally, the cost of such proceedings can be a deterrent for some debtors, as there are legal fees involved, and the outcome is not guaranteed.

The Future of Student Loan Discharge in Bankruptcy

The landscape of student loan discharge in bankruptcy is evolving. Legislative proposals and ongoing debates suggest that the law may change in the future to make it easier for borrowers to discharge their student loans in bankruptcy.

In conclusion, while discharging student loans in bankruptcy remains challenging, recent legal developments indicate a shift towards a more borrower-friendly approach. Borrowers considering this route should seek legal advice and be prepared for a potentially complicated legal process. The evolving nature of this area of law also suggests that future debtors may find a more accessible path to relieving the burden of student loans through bankruptcy.

About the Author

John Ioakimidis

Experienced Bankruptcy Lawyer Handling Bankruptcy case in the Chicago Metropolitan Area For over 25 years, I have helped hundreds of individuals, families, and businesses erase or restructure tens of millions of dollars of debt in the greater Chicago area - including Cook, Lake, DuPage, McHenry,...


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